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Business News/ Opinion / Views/  The delicate balance that India’s budget for 2022-23 must achieve
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The delicate balance that India’s budget for 2022-23 must achieve

It will have to support growth with fiscal levers but simultaneously aim at modest fiscal consolidation back to its glide path

It will have to support growth with fiscal levers but simultaneously aim at modest fiscal consolidation back to its glide pathPremium
It will have to support growth with fiscal levers but simultaneously aim at modest fiscal consolidation back to its glide path

India’s Union Budget for 2022-23 will attract a lot of attention from different stakeholders in the economy, particularly as it comes at a time when India is in the grip of a third covid wave. On one hand, India’s growth momentum will need continued support from fiscal levers, but at the same time, there would be expectations for the government to aim for modest fiscal consolidation, so as to be able to bring down its fiscal deficit to 4.5% of gross domestic product (GDP) by 2025-26, as per the proposed glide path. A delicate balance will need to be maintained for multiple objectives to be achieved. But one should not expect the budget to be a panacea for all economic problems, as many policy decisions may be announced outside the budget, like in the past. Let’s discuss key expectations from this budget.

Nominal GDP assumption: We expect authorities to assume 13% nominal GDP growth for calculating the 2022-23 fiscal ratios.

Revenue and expenditure: On the back of a strong revenue-growth out-turn in 2021-22, even after accommodating the goods and services tax (GST) compensation cess and excise-tax cuts, overall revenue collections can rise another 16-17%in 2022-23 if nominal GDP grows at the assumed 13% rate. With the expenditure base already having risen significantly in 2020-21 and 2021-22 to support growth, total expenditure growth of 11% in 2022-23 should be adequate to sustain the ongoing growth recovery.

The Centre’s fiscal deficit: Given the ongoing covid wave, the government will likely aim for slower fiscal consolidation, setting its fiscal deficit target at 6.5% of GDP in 2022-23 (versus the 7.0% likely out-turn in 2021-22), instead of bringing it down to 6.0%.

Capital expenditure: The strategy of boosting on-budget capital expenditure should be kept up (we expect 5.5-6.0 trillion allocation for 2022-23; it was 5.5 trillion in 2021-22), which will likely help propel the private-sector investment cycle from the second half of 2022-23, once capacity utilization starts improving on the back of a stronger demand recovery. The quality of fiscal spending matters in the medium term. An indicator to track in this regard is the revenue deficit/ fiscal deficit ratio (lower the ratio, the better). Since 2016-17 (when it was at a low of 59.1%), this has moved up to over 75% currently, indicating a deterioration in the quality of fiscal spending even before the pandemic struck India. We expect the authorities to aim at lowering this ratio gradually once the pandemic-related emergency spending requirement reduces.

Time to focus on improving execution efficacy: Several reforms related to supply-side improvement, boosting local manufacturing (production-linked incentive schemes), fostering an entrepreneurial spirit, accelerating urbanization, asset monetization and privatization have already been announced over the last few years. At this stage, it is important to execute these growth-and-productivity enhancing reforms effectively, rather than announce any new reforms.

Targeted demand support: While the budget would seek to create jobs, it must be done in a way that inflation does not spiral out of control. A prudent balance between capital and consumption expenditure will need to be kept, even as targeted demand support is provided for poorer sections of society and micro, small and medium enterprises. This is important to keep inflation from rising above the 6% threshold and make the economy more resilient over the near- and medium-terms.

Disinvestment: If the initial public offer of Life Insurance Corp of India fails to materialize by end-March, the 2021-22 disinvestment target of 1.75 trillion will see a large shortfall, but the pipeline for 2022-23 will then look much better. While uncertainty looms at this stage over the final outcome, the government will factor in at least 1.5 trillion as disinvestment proceeds for 2022-23.

Bond index inclusion: We expect the budget to propose the necessary changes in tax laws that may allow India to become part of global bond indices. If this is done, it is reasonable to expect index providers to announce India’s inclusion in bond indices sometime in the first half of 2022-23.

Small savings: 26% of the fiscal deficit will likely be funded through small savings, in line with the trend of the past few years.

Market stabilization bonds: The budget is likely to make an allocation for market stabilization bonds (MSBs) of about 1.5-2 trillion to help the Reserve Bank of India withdraw surplus liquidity from the system through 2022-23.

Sector-specific: The health sector is likely to get top priority, and the potential for a booster shot to be made available to the country’s entire eligible adult population (at some point) means that the allocation for this sector will need to stay high for 2022-23. In the 2021-22 budget, 350 billion was allocated particularly for vaccination-related costs.

No major tax cuts are expected for corporates and households, as tax rates have already been lowered in previous budgets. But an increase in the basic tax exemption limit (from 250,000 currently) for individual taxpayers is possible to place more disposable income in the hands of people and boost consumption.

The allocation for agriculture and rural development is expected to remain high. The National Rural Employment Guarantee scheme allocation was about 1 trillion in 2020-21 and 2021-22, which may rise to 1.5 trillion in 2022-23.The budget will likely keep its allocation high for the MSME, tourism, travel and housing sectors, which have been hurt badly by multiple waves of the pandemic.

Kaushik Das is India chief economist, Deutsche Bank

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Published: 23 Jan 2022, 09:28 PM IST
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